A subsidiary company is a company with a majority of its stock held by a parent company or it is a company controlled by another entity. At least 50 percent of a company’s stock must be owned by another firm for the company to be considered a subsidiary. A wholly owned subsidiary is 100 percent controlled by another business.

A Company can be a subsidiary Company in any of the following cases –

Case – I

A company is deemed to be a subsidiary of another if: ‘

(a)   that other controls the composition of its board of directors,

(b)   that other holds more than half in nominal value of its equity share capital; or

(c)    The first-mentioned company is a subsidiary of any company which is that others subsidiary.

For Example: Where company Y is a subsidiary of company X and company Z is a subsidiary of company Y then company Z shall be the subsidiary of company X. Again, if company A is a subsidiary of company Z, then company A shall also be a subsidiary of company Y and consequently also of company X.

But in the above case –

The following shall not be counted –

• Any shares held in a fiduciary capacity;
• Any shares held by B Company or by its nominee or its subsidiary or subsidiary’s nominee if the ordinary business of B Company or its subsidiary, as the case may be, includes the lending of money and the shares are held as security in the ordinary course of business
• Any shares held by virtue of any provisions relating to debentures of A Company or of a trust deed for securing any issue of such debentures

The following shall, however, be counted –

• Shares held by B Company’s nominee other than in fiduciary capacity;
• Shares held by B Company’s subsidiary or its nominee other than in fiduciary capacity

Case – II

A company can be a subsidiary (Say A) of another Company (Say B) in any of the following four circumstances –

Let B Company controls the composition of Board of Directors of A Company. For that, it is required to ensure that the Articles of Association of A Company contains the provision of empowering B Company to appoint or remove the directors of A Company. Then only such control shall be deemed if B Company controls majority of directors of A Company, but solely by its exercisable powers, i.e;

It can appoint all or other majority of directors of A Company fulfilling any one of the following condition –

• that the appointment cannot be made without the consent of B Company; or
• that the directorship is held by an individual nominated by B Company; or
• that the appointment follows necessarily from his appointment as director or manager or because the appointee holds any other kind of office or employment in B Company;

Company A can automatically become a subsidiary of Company B by falling in any of the above cases.

Advantages and Disadvantages of Forming Subsidiary Companies

Advantages

i.     The parent can provide the monetary means and capability to jump start new companies and products.

ii.   The holding company provides the subsidiary company with buying power, research and development funds, marketing money and know-how, employees, technical expertise and other features which otherwise it could not afford or accomplish alone.

iii.  Ability to compensate profits and losses of one part of a business with another

iv.  Allows for joint ventures with other companies with each owning a portion of the new business operation.

v.    Liabilities and credit claims are locked in that subsidiary and cannot be passed on to the parent company

vi.  The biggest advantage to a parent company of maintaining numerous subsidiaries is the tax and creditor protection benefits.

Disadvantages

i.     A major disadvantage of being a subsidiary of a large organization is the limited freedom in management

ii.   Legal paperwork involved with creating a subsidiary can be lengthy and expensive

iii.  Decision making can become time consuming as issues often must go through various chains of command within the parent bureaucracy before any action can be taken.

iv.   Control also becomes an issue when a subsidiary is partially owned by another outside organization

v.    The parent company may have to pay for the subsidiary’s debts even if it has no legal obligation.

vi.   The parent company could be liable for damages if an operating subsidiary violates the law or is subject to enforcement actions

After a company becomes a subsidiary of another company then the parent company can exert a high degree of control over corporate management and better ensure that business practices, trade secrets, expertise and technical knowledge remain in house.

Taxmantra.com will assist you in all Company Law Secretarial Services. Please feel free to contact us for any assistance.

Call Us: +91 923 0033 070   “Or” Email Us: info@taxmantra.com